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How Much Money Can I Borrow with a Mortgage?

Posted by: Jason Mericle | Oct 28,2007

There are a number of factors to be considered in order to calculate the size of a mortgage you would be able to afford.  A simple internet search will uncover a number of different mortgage calculators that factor in different figures in order to come up with a mortgage payment that you can afford.  These mortgage calculators factor in your income, monthly debt, down payment provided, estimated closing costs as well as loan specifics such as the rate and term of the loan.  The calculator evaluates your input and comes up with a mortgage payment as well as a purchase price you will be able to afford. Mortgage qualification is based on debt-to-income ratios as well as your credit worthiness.   This is typically based on a formula that your housing expenses should not exceed 28% of your gross monthly income.  Housing expenses include your mortgage payment, taxes, and insurance.  This is called your front-end ratio.  This is calculated by multiplying your gross annual income by 28% and dividing that figure by 12 months.  (Gross annual income x 0.28 / 12 = front-end ratio)  This will determine your maximum housing expense.  Additionally your total debt should not exceed 36% of your gross monthly income.  This would include the housing expenses as well as car payments, credit cards, personal loans, child support, alimony etc. This is called your back-end ratio.  To calculate your back-end ratio, multiply your gross annual income by 36% and divide by 12 months. (Gross annual income x 0.36 / 12 = back-end ratio). This figure is your maximum debt-to-income ratio.  Conventional loans typically allow between 26-28% front-end ratios and 33-36% on the back-end.   Your interest rate will also be derived from your credit worthiness which is measured by your FICO score.  Because of this, it’s extremely important to keep track of your FICO score, particularly when you are intending on applying for a mortgage. 

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